Poonawalla Fincorp Limited analyst Q&A

Firstly, congratulations, Arvind, on a good quarter on the operating front, and thanks for sharing a fairly detailed update on the progress that the company has made. I'm sorry, I have a couple of questions. First, to begin with, like we had discussed in t he earlier call, I mean, all the recalibration that we had taken on the STPL book, and the resultant provisions were already made. If you could just throw some light as to the provisions which have been made this quarter are pertaining to which particular product category and what would be the write -off for the quarter?

Yes, sure. Thanks, Umang. Sanjay Miranka, do you want to give him a quick glance?

Yes. So out of the total ₹348 crores charge, about ₹200 crores is towards STPL and the rest is spread across other products.

Okay and what would be the write-off for the quarter?

The total write-off is ₹676 crores for the quarter, and this is spread across various products.

Okay. Understood. The other thing which I wanted to understand is that now we kind of understand that the book is sort of evolving and clearly a lot more new products will come into the fold. But how should we look at our provisioning policy or let's say, simplistically put, how should we look at our steady-state credit cost? Now I understand that it might be difficult to put a number to it, but typically, how should be the provision cover? Where should it stabilize? And typically, the credit cost corridor, if you can highlight, that would be really helpful.

So, on percentage terms, we expect that the credit cost will keep coming down quarter -over- quarter. On the broad guidance, I think we'll wait for Q4, and then we'll give you for the next year.

So, Umang, I think the way we are seeing it is incremental business, we are very well calibrated as that's growing at a very fast rate. Our collection teams also , let me give you a sense , I think that will give you the confidence , the collection team continues its relentless focus to recover the amounts outstanding through strategic and focused efforts of the STPL portfolio. So, there is already an improvement of 380 basis points in the boun ce rate resolution Quarter-3 over Quarter-2. As this quarter sp ans out, I think the whole aim was that predominantly if we can, continuing our financial discipline, in line with our established policy and governance framework, we've written off outstanding exposures in STPL portfolio based on the collection feedback. So, the whole idea is that how effectively this quarter as well, we can move forward, because our collection teams are exuding a fair amount of positive confidence. The way I shared with you that they've already improved by 380 basis points, and the whole team is on board. So as a matter of fact, we are on an optimistic scale. Some of these bulk of these write-offs that Sanjay Miranka shared with you is old STPL related books.

Okay. Fair point and the last question from my end, Arvind, is, let's say, if one was to look beyond these few quarters that we are talking about, I mean, on growth, you already alluded to the fact that growth will probably be as to your guided range or even better. But on profitability, how should we look at the ROA trajectory as the book builds up over FY26 and FY27? Yes, that would be helpful.

Yes, I think, probably this time, I've given a very clear guidance that we see very, very robust 4 AUM quarters leading up to, I've used the word, a very robust profit, FY26-27. That means we expect that the ROAs will be probably in the range of around 3% -3.5% by the time the third- year ends. So that clarity will be much easier to give you. I think it's more important that we first build the building blocks, because we are going after almost 11 products. Those 11 products, our confidence level is very high to build it ac ross distribution. If you look at the manpower hiring, we're already up by 30%. Not only the management team, I didn't cover the actual feet on street is on board. I've given you micro details of the work being done. So, I'm expecting the building blocks to lead to fairly robust profits and those robust profits will continue thereafter. So, ROAs, I think, get built once your businesses go into steady, because there's a fair amount of investments being made in these businesses. And you're well aware that you make new businesses, ROAs work most effective by the time they reach third year, especially the new businesses. So existing businesses also, productivities are going up, and which is why, if you carefully see operating cost as a percentage to AUM, we are pretty much in the industry range, because you find the AUMs are moving very fast, because this is a management team that's not experimenting with things. We are playing within an area that we know what we're doing. So, the guidance we have given right now that we expect a very robust profit starting that year. So, the idea is how do you create a sustainable business? How do you create sustainable profits? What are sustainable profits? Sustainable profit means profits that will sustain for years to come. So how do you build it? You've got to build it with investments around 10-11 businesses. These then will create a massive AUM. That will be like a tidal wave, and I expect that to turn into very robust profits and thereafter. That's the way I see the trajectory moving.

Perfect. I mean that sounds perfect. Just a clarification, when you say third year, you are referring to FY27, right? Is that understanding, correct? So that we are on the same page?

I couldn't hear you. Can you repeat it?

Yes. I'm sorry. I said that when you say third year, you are referring to year ending March '27, just to clarify, so that we are on the same page.

I think FY26-27 is going to be a very robust year. We are optimistic on the ROAs. I don't want to put a guidance number to it, Umang. I think the year after that, ROAs will start kicking in for the better every year, because the business calibration and the plan of the se 7 businesses, all ROAs. Let me give you another sense actually. That might give you a better sense. All these 6 businesses that I have planned and the one I've announced today, all in my plan is an ROA of 3%-4.5%. I think you guys are the best judge to figure out what my final mix ROAs will be, because in my plan, I'm touching all businesses which are 3% -4.5%. That should give you a sense of what ROAs are roaming in my head, and these are going to be 7 businesses that we are confident of pulling off.

The next question is from the line of Pranay Mehta from Investec.

Sir, congratulations on a good set of numbers. I wanted to ask about provisioning and write-offs on the old book. I wanted to just clarify that what you said before, would that hold true going forward as well? Are we expecting anything there?

You'll have to repeat the question, Pranay. It was not very clear- if I can request you.

Sure, sure. So, I wanted to check, would you have any provisions on the old book? Any write - offs that we expect further on the old book? Or is that all completely done and clear?

So, I think, Sanjay Miranka, give him a sense.

So, the write-off on old book was to the tune of ₹520 crores. So, the majority of write-off was on old book.

Sure. What would be the guidance for that going forward? Are we expecting anything coming or are we done?

So, Pranay, what happens is, when you put in these provisioning for write-off in the subsequent time, the preparation happens of those cohorts of customers. So as and when those cohorts get into that situation, that's when they've been estimated to use the write-offs.

And with these, we have sufficient provisions.

The next question is from the line of Nischint Chawathe from Kotak Institutional Equities.

I think it's again on similar lines. If I look at the credit cost of ₹350-odd crores for the quarter, more from a modelling point of view, how should we sort of expect it to trend? Is there a way we can kind of corroborate it with your loan book mix and sort of say that what more could be required to provision the older book, et c.? If there is something that you can , some pointers in the presentation that you can guide us to, which will help us to model this number going forward for the next, let's say, 4 to 6 quarters?

Yes. So, we expect a sequential decline in terms of percentage credit cost quarter -on-quarter. Obviously, it will be difficult to kind of put a number on the future credit cost and like we said, I think as the businesses get built and which is a good mix of secured, unsecured and across product lines, which Arvind spoke about.

I think he's talking about the overall, did you say about the overall?

Yes. I think overall credit cost, I think that the new book, we are very, very confident. I think whether it's 30, 60, 90, it's extremely well calibrated. All the AUM growth that I'm talking about, I mean, we took it when it was ₹25,000 crores. We're talking about a substantial book in probably the next 4 quarters. So, we are expecting things with every quarter moving rapidly substantially better. It's just that I had advised from an investor's point of view that please measure us on AUM because I want to create sustainable profit, because if it’s only profit it is much easier to create. If I have to create sustainable profits, we're going to just invest in that number of products, which gives me different distribution, and it creates a very different kind of ti dal effect, which adds immense value to the whole construct. So, credit cost, I mean, I am very optimistic on the kind of calibration we are doing. As a matter of fact, even the one product for which we provisioned one time, STPL, we have managed to crack the solution to such an extent that the bounce ratios, I think, Shriram, is around 50% down, right?

Yes.

So, it's something we're planning to even look at it in a controlled manner to gradually step it up, because we are well in control of that and we'll further calibrate it and step it up. So, I think between the mix of all the businesses that we are talking, between ROAs and credit quality, I think our bias is fairly strong on the risk side. So, when I say it in the stated objective. So, our credit cost should quarter-on-quarter start trending in the direction of the strategic stuff that we are building, because AUM is all controlled by how we are calibrating the businesses.

Fair point, but given the fact that we are fairly well capitalized, would you want to take one large hit, clear up the book? And if there is any reversal that comes in the later period, I think that's well and good, so that we'll be able to kind of track t hese metrices in a more linear manner. Because with this, it's a little difficult to kind of figure out as to where and how long it takes for the legacy book to be cleared.

Yes. See, we had taken one-time additional provision in Q2. As Arvind alluded to, the collection experience is pretty good . We have seen a significant improvement in bounce rate resolution from Q2 to Q3. In fact, in Q3 also, Q3 average to December bounce rate resolution has further improved. So, with that, I think we are hopeful that the collection should keep pace, and we have to assess it quarter-on-quarter.

So, I think bulk of the problem, in my view, we're mostly trending towards much more robust building blocks from here on. Even on the old STPL book, both the best effort that can be put is on. See, you got to, as a financial discipline, do one-time provisioning with a sense of ability for collecting. You can't just go and provide for everything and then not make any effort on collections. So, the approach of a business has to be to collect. We are confident, I had mentioned to you last time that by Jan, our collections will shoot up. As a matter of fact, by December itself, our collection figures are looking very promising. But there's a steep improvement even in that quarter, if you see, there's a steep improvement between November, December. So that is the point I wanted to make. So, I think we look fairly in control. I don't think old STPL book should hold on our discussion anymore. In my view, we are well calibrated even on the STPL now. I think we are confident enough to produce the business lines from here on, AUM is nothing, but interest income increasing every quarter. It's just that when you financially show profits, it becomes averages. So that's the reason I've advised FY26-27 to be a very robust year.

The next question is from the line of Abhijit Tibrewal from Motilal Oswal.

So, a lot of discussion has already happened on credit costs. I just wanted to ask the same question again a little differently to see if I can get a different answer. So, until now, from what I understood, we are guiding that credit costs will keep coming down sequentially, which is fair. We did say that we have taken onetime credit costs in STPL last quarter, which is fair. We also said that, I mean, STPL is now well calibrated, and we are confident of growing that book again. I'm just kind of referring to , I mean, if I just go back, while the whole management team itself has changed, we have a new management team in place, if I just go back maybe 3 -4 quarters back and go through transcripts and audio recording, I mean, we used to hear that the new book is very good. GNPAs are as low as 0.1% -0.2%. My one simple question for you, Arvind sir, is out of the ₹27,000 crores of AUM that you inherited, what is the credit cost that you expect on the inherited AUM?

Credit cost as we go along?

On the ₹27,000 crores of inherited book.

What was the figure?

What is the cost estimated going forward on that?

To give you a sense, I think fundamentally, if you hear my first earnings call, for which I stand credible, within 40 days of my earnings call, I gave you a sense that there's one ₹6,000 crores book, which I sense a problem and I said we will build on the businesses. Second earnings call, I gave you a list of the products which I'm going to do. Third earnings call, I've given you the progress of that, and I've given you the credit calibrated. Shriram has joined in first time on this earnings call, where he's given you a feel on the fact that we are on the verge and confidence of launching credit products, which the industry has not launched. Now for us to have that confidence, while we've announced 6-7 products, I think it can give you a sense of what quality of credit we are moving from here. Essentially, initially, we saw the problem. We did provisioning one-time. We are continuing the financial discipline and policy. We are improving the collections. We have written off outstanding exposures, but that's an approach we are taking.

Okay, sir. So basically, all that I was trying to understand is that I mean, while you said in your first earnings call that ₹6,000 crores worth of book was the extent of the problem, what was the quantum of the problem? All I was trying to understand is what was the extent of the problem in that ₹6,000 crores book? Essentially, I mean, out of that ₹6,000 crores, how much do you expect to be eventually written off?

Out of the ₹6,000 crores, how much to be written off? Eventually? If you ask me, I hope problem is behind us. But I think it's better to be conservative and say that every quarter, we'll keep a close eye on it. There are multiple efforts being made on this, and our progress is looking visibly successful over the last 60 d ays, a little sharper success in the last 60 days of this portfolio, because collection also took time to beef up. This very precise stuff I had shared with you in the second earnings call. The exact number is difficult to say in this ₹6,000 crores. But remember one thing, we've taken a one -time provision. There's write -offs done. We seem to be fairly adequately provided on it. I think I'm very optimistic that I think the framework is more in our favour from here on.

Got it. Got it. This is useful. That's all I wanted to confirm. I think, I mean, we're very clearly moving in the right direction. So happy to see that, and I wish you and your team the very best.

Yes. So, while I can give you a very precise answer, I'd like to be a little conservative, let me be honest.

Sure sir.

Thank you. I appreciate your questions. Thanks.

Thank you. Ladies and gentlemen, that was the last question for today. With that, we conclude today's conference call. On behalf of Poonawalla Fincorp Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.